The Truth Behind those
Low Interest Rates
Written by D. Gamalinda, Underwriter
A low interest rate for a mortgage loan
can be misleading. If one relies solely on what the loan interest
rate is in order to decide whether or not to secure that loan, then
he is doing himself a disservice.
Several factors surround the actual
determination of a loan's interest rate. Below are factors that can
affect the interest rate of a loan.
- Is the loan rate 'FIXED' or is it
'ADJUSTABLE'?
- How large is the loan?
- What is the borrower's 'CREDIT SCORE'?
- What are the 'CLOSING COST FEES' associated
with the loan?
Check the Fine Print
Be sure to ask whether or not the loan rate is 'fixed' or 'adjustable'
before deciding to accept the terms. An adjustable rate mortgage (ARM)
may appear more sound and seem to offer the borrower
more savings because the interest rate is often times much lower,
perhaps up to 4% lower than other lenders, in comparison to a fixed
rate mortgage. However, the borrower needs to understand that with
today's market, interest rates are already at their lowest and will
have no where else to go but up. By accepting an ARM, the borrower
is declaring their agreement to the truth that their original interest
rate will most likely go up as the loan term progresses.
Other lenders will claim to be offering
'fixed rates' but in truth, the interest rate quoted is fixed only
for a certain time frame, i.e. 5 years, then are subject to the current
market rates after the 5 year time period.
Advertising to Gain More Inquiries
Some lenders will advertise a lower interest rate in order to
attract customer inquiries, choosing not to disclose upfront the fact
that those lower interest rates are available only for smaller loan
amounts. For example, a lender may offer loan amounts of $49,999 or
less at a 6% interest rate, however, if you ask for a loan of $50,000
or greater, then the interest rate may drastically jump up to 12%.
A smaller loan may have a lower interest rate because there is less
risk involved for the lender in lending a smaller amount of money
versus that of a larger loan.
Excellent, Good, or Fair
Credit
To a lender, someone with excellent credit proves to be less of
a risk to loan money out to versus someone with mediocre credit. As
a safeguard, a lender can adjust the interest rate according to the
borrower's creditworthiness. The better the borrower's credit is,
the lower the interest rate the borrower is qualified for.
Getting Hit with Closing
Costs
Processing a loan and all the other tasks required to get the
loan funded is the 'service' that borrowers pay for when a loan is
approved. Because a 'service' needs to be paid for, some lenders will
advertise an unusually low interest rate to gain inquiries, plus may
make up the difference in compensation via high closing costs. For
example, a lender who loans out $50,000 can legally charge up to $3995
in closing costs which the borrower must pay out of his pocket. Ask
what fees you may encounter before settling with a lender based only
on a lower interest rate.
Do your research when finding
an appropriate lender to fund your needs. The ultimate truth behind
those low interest rates, is that they may not be what they appear
to be. Because of our customer oriented service, you will find that
CaliforniaLoanInfo.com offers straightforward loan products that suit
the smart, prudent borrower: loans with the lowest fixed interest
rates on small and large loan amounts, as well as an exceptionally
modest fee schedule.
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